HE 

74G 

H73 


UC-NRLF 


WILL  AMERICA  RETAIN 
IT'S  MERCHANT  FLEET 


FINAL  REPORT 

TO  THE 

PRESIDENT 

31st    JULY.     1919 


DOCUMENTS  DEPARTMENT 

QIC  2  01962 

U8RARY 

UNIVERSITY  OF  CALIFORNIA 


FROM 

EDWARD   N.  [HURLEY,  CHAIRMAN 

UNITED  STATES  SHIPPING  BOARD. 


#73 


TO  THE  PRESIDENT: 

At  the  signing  of  the  armistice  the  United  States  found  itself  in  possession, 
or  prospective  possession,  of  almost  fourteen  million  deadweight  tons  of  ocean- 
going merchant  shipping.  This  fleet  represents  a  construction  investment  of 
$2,861,755,570,  and  alone  among  the  vast  outlays  made  for  the  prosecution 
of  the  war,  it  seems  capable  of  returning  close  to  100  per  cent  salvage  to  the 
Government.  In  addition,  if  properly  administered,  it  is  capable  of  greatly  in- 
creasing the  activity,  prosperity  and  wealth  of  the  American  people  by  extending 
their  trade  with  all  parts  of  the  world.  The  careful  development  and  efficient 
utilization  of  this  new  power  looms  large  as  a  matter  of  national  importance. 

In  Europe,  I  found  it  taken  for  granted  that  our  Government  and  our 
people  would  co-operate  to  derive  the  utmost  possible  advantage  from  this  op- 
portunity. The  fact  that  our  war-born  fleet  is  out  of  balance,  i.  e.,  consists  of 
too  many  small,  slow  cargo  vessels,  and  too  few  large,  fast  passenger  and  cargo 
vessels,  was  held  to  constitute  no  barrier  to  our  success.  The  speed  with  which  we 
had  built  our  emergency  ships  seemed  sufficient  guaranty  that  we  could  remedy 
our  deficiency  quickly.  Meanwhile  the  run-down  condition  of  the  European 
fleets,  (the  congestion  of  the  ports  of  the  world  has  kept  hundreds  of  ships  out 
of  service)  and  the  unprecedented  world-wide  demand  for  any  sort  of  tonnage 
seemed  to  assure  the  profitable  employment  somewhere  of  every  ship  we  could 
put  into  the  water.  The  British,  who  are  more  heavily  interested  in  ocean  trans- 
portation than  any  other  people,  and  whose  fleet  has  borne  the  brunt  of  the 
war's  depreciation  and  losses,  were  keenly  alive  to  this  situation.  The  British 
press  discusses  frankly  the  potential  prowess  of  England's  new  competitor 
on  the  sea. 

Upon  my  return  to  the  United  States  in  February,  I  was  surprised  to  find 
a  wholly  different  feeling.  Instead  of  enthusiasm  I  found  what  I  feel  I  can  prop- 
erly designate  as  organized  pessimism.  The  American  people  wanted  a  merchant 
marine.  There  is  no  doubt  about  that.  But  a  large  number  of  shipowners, 
ship  managers,  ship  brokers,  marine  insurance  men,  and  others  who  are  pre- 
sumed to  be  authorities  on  the  subject,  were  filling  the  daily  newspapers  with 

7128 


interviews,  announcements  and  warnings  to  the  effect  that  our  new  fleet  would 
prove  a  white  elephant  on  our  hands.  They  solemnly  declared  we  never  could, 
cannotN  and  never  will,  be  able  to  build  ships  in  competition  with  certain  other 
nations;  that  American  labor  is  so  much  more  expensive  and  so  poorly  trained  as 
compared  with  British  labor,  that  even  47  years  of  tariff  exemption  on  ship- 
building materials  had  failed  to  make  us  a  shipbuilding  nation,  except  for  the 
purpose  of  supplying  vessels  to  our  inland  and  coastwise  trades  from  which  the 
competition  of  cheap  foreign  ships  is  excluded  by  law. 

OPTIMISM  ABROAD— PESSIMISM  AT  HOME. 

As  for  operating  American  ships  in  competition  with  foreign  ships,  any 
such  proposition  was  declared  wholly  out  of  the  question.  The  American  wage 
scale;  the  American  standard  of  living  quarters  and  victualing;  the  excess  num- 
ber of  men  required  by  American  law;  the  privilege  granted  American  crews 
to  leave  a  ship  when  and  where  they  please ;  alleged  oppressive  American  steam- 
boat inspection  regulations,  measurement  rules,  and  a  dozen  other  reasons, 
plausible  enough  on  the  surface,  were  advanced  to  show  that  the  operation  of 
ships  under  the  American  flag  is  economically  impossible. 

I  had  heard  all  these  arguments  before.  So  has  everyone  else.  The  records  of 
congressional  hearings  are  full  of  them.  They  have  been  resurrected  time  and 
time  again,  whenever  a  ship  subsidy  bill  is  under  consideration.  The  last  time 
I  heard  them  was  when  the  Shipping  Act  of  1916  was  being  drawn,  and  the  in- 
vestigation of  their  truth  is  one  of  the  duties  with  which  the  Shipping  Board  is 
specifically  charged  by  law.  I  wish  to  say  that  none  of  them  impressed  me  as 
the  most  important  factors,  even  if  100  per  cent  were  true,  and  it  is  now  admitted 
generally  that  they  are  true  only  in  a  very  limited  degree.  I  doubt  if  any  or  all 
of  them  ever  has  or  have  been  an  insurmountable  obstacle  capable  of  being 
offset  only  by  a  subsidy  from  the  public  treasury,  or  other  special  concession  at 
the  public)  expense.  At  the  present  time  I  am  sure  that  none  of  them  is  either 
real  or  important  enough  to  be  given  so  much  prominence  as  weighty  factors  in 
the  problem. 

For  instance :  the  experience  of  the  war  period  has  proved  conclusively  that 
our  shipyards  can  build  six  or  seven  times  as  rapidly  as  the  shipyards  of  any 
other  country  in  the  world,  and  the  fact  that  our  war-built  vessels  have  re- 
ceived the  100  A  1  classification  from  Lloyds  Register  of  Shipping  proves  that 
our  work  is  fully  up  to  the  standards  of  the  British  yards.  I  cite  British  yards 
specifically  because  their  workmanship  always  has  been  accepted  as  the  stand- 
ard of  the  world. 

It  is  true  that  our  war-built  vessels  cost  three  times  as  much  as  similar  ships 
cost  before  the  war,  but  the  same  thing  is  true  of  the  war-built  ships  of  Eng- 
land, Scandinavia,  Japan  and  other  countries.  Morever,  American  construction 
costs  are  decreasing  while  those  of  Europe  are  rising.  You  can  contract  for  an 

4 


American  ship,  six  months  delivery  for  a  final  flat  base  price  of  about  $155  a 
deadweight  ton.  In  England  the  best  you  can  do  is  to  contract  for  two  years 
six  months  delivery  at  a  base  price  of  about  $150  a  deadweight  ton  plus  what- 
ever increase  in  the  cost  of  labor  and  materials  may  occur  in  the  meantime.  The 
argument  about  tariff  exemption  on  shipbuilding  materials  for  47  years  has  no 
point  at  all.  During  the  last  eight  years  there  never  has  been  a  time  when 
American  ship  steel  has  not  been  at  least  $5  a  ton  cheaper  than  British  ship  steel. 
Today  the  difference  in  favor  of  the  American  shipbuilder  is  from  $14  to  $17  a 
ton,  according  to  type  of  material. 

THE  TRUTH  ABOUT  OUR  SHIPBUILDERS  AND  OUR  SHIPS. 

Immediately  upon  my  return  from  Europe  last  February  I  reported  these 
fact  to  my  colleagues  in  the  Shipping  Board,  and  the  text  of  the  report  was 
given  wide  currency  by  the  newspapers.  I  also  showed  that  the  world- wide 
demand  of  labor  for  something  approaching  the  American  standard  of  living  had 
raised  the  labor  cost  of  everything  everywhere;  also  that  the  provision  of  the 
Seaman's  Act  which  permits  men  to  leave  a  ship  when  and  where  they  please, 
and  forbids  the  arrest  of  a  sailor  leaving  a  foreign  ship  in  an  American  port,  had 
caused  foreign  seamen  to  leave  in  American  ports,  and  to  join  American  vessels 
in  such  numbers  that  the  wages  of  seamen  on  board  ships  of  all  the  important 
maritime  nations  had  been  raised  approximately  to  the  American  level. 

Personally  I  do  not  attach  much  importance  to  this  circumstance,  because  the 
wage  and  subsistence  items  combined  constitute  at  the  maximum  12  per  cent  of 
the  total  operating  expenses  of  a  ship.  I  cite  it,  not  particularly  in  refutation 
of  the  argument  that  high  wages  furnish  any  valid  reason  why  a  high-wage  ship 
cannot  compete  with  a  low-wage  ship,  but  rather  to  show  how  superficial  is  the 
chief  argument  that  has  been  advanced  to  prove  the  contention  that  it  is  im- 
possible to  operate  ships  under  the  American  flag.  The  other  arguments,  on 
their  very  faces,  are  equally  superficial;  and,  in  the  case  of  inspection  laws,  etc., 
they  can  be  easily  corrected  the  moment  it  is  affirmatively  shown  that  they  are 
unwise.  At  the  same  time,  it  may  be  worth  while  to  note  in  passing  that  none 
of  these  alleged  handicaps  seem  to  have  prevented  the  Red  "D"  Line  from  doing 
a  successful  business  under  the  American  flag  between  New  York,  the  West 
Indies  and  Venezuela  during  the  last  thirty  odd  years;  nor  have  they  inter- 
fered with  the  prosperity  of  the  Atlantic,  Gulf  and  West  Indies  Company,  whose 
vessels  also  fly  the  American  flag.  The  successful  competition  of  the  American 
flag  ships  of  W.  R.  Grace  &  Co.  with  the  powerful  British  P.  &  0.  Line  in  the 
South  American  trade  has  been  a  matter  of  common  knowledge  for  many  years; 
and  last,  but  perhaps  most  significant  of  all,  is  the  fact  that  the  vessels  of  the 
Pacific  Mail  Steamship  Company,  flying  the  American  flag,  have  successfully  met 
the  competition  of  ships  paying  the  lowest  wages  on  earth  in  the  trans-Pacific 
trade  for  about  seventy  years. 


Of  much  more  importance  than  the  wage-and-subsistence  item,  which  is 
not  over  12  per  cent  of  the  total  operating  cost,  is  the  coal  fuel  item,  which 
ranges  between  30  and  40  per  cent  of  the  total.  Here  the  advantage  is  heavily 
in  favor  of  the  ship  which  takes  her  coal  in  an  American  port.  The  use  of  oil 
fuel  turns  coal  bunker  space  into  revenue-earning  cargo  space;  gives  a  larger 
steaming  radius,  and  also  reduces  the  propelling  cost  per  mile.  Here  again  the 
American  merchant  marine  as  a  whole  has  a  really  worth-while  competitive  ad- 
vantage because  it  contains  a  greater  percentage  of  oil-burners  than  any  other 
merchant  marine  in  the  world.  Also,  the  matter  of  effecting  a  quick  turn- 
around offers  an  opportunity  for  turning  costly  idle  days  into  money-making 
days  at  sea  which  is  not  yet  fully  appreciated,  and  which  American  ships  are 
free  to  use  their  initiative  in  developing  by  planning  their  voyages  and  arrang- 
ing for  return  cargoes  in  advance. 

SUPERFICIAL  CHARACTER  OF  ARGUMENTS  AGAINST  AMERICAN 

SHIP  OPERATORS. 

I  almost  regret  having  written  this  last  paragraph  because  the  items  I  have 
cited  do  not  lie  at  the  root  of  the  problem,  and  are  open  to  the  same  charge  of 
random  superficiality  which  I  have  laid  against  the  wage-and-subsistence  and 
navigation  law  items  they  offset.  Still,  it  is  important  to  bear  in  mind  some  of 
these  things:  in  order  to  fully  understand  the  appalling  superficiality  with  which 
the  merchant  marine  problem  has  been  set  forth  and  passed  upon  offhand  by 
men  who  appear  before  Congress  and  undertake  to  influence  public  opinion  by 
giving  out  press  interviews  as  authorities  on  the  subject. 

Naturally,  after  reading  columns  of  newspaper  articles,  and  pages  of  maga- 
zine and  trade  paper  articles,  telling  how  and  why  we  could  not  operate  ships 
under  the  American  flag,  I  was  anxious  to  learn  what  constructive  suggestions 
the  men  responsible  for  these  articles  had  to  offer.  Accordingly,  I  announced 
that  the  Shipping  Board  was  studying  the  problem  and  would  welcome  any  help 
anyone  interested  in  creating  and  maintaining  an  adequate  American  merchant 
marine  might  care  to  give. 

The  results  were  disappointing.  Almost  without  exception  the  letters  I  re- 
ceived from  men  connected  with,  or  claiming  knowledge  of,  the  steamship  busi- 
ness assumed  the  existence  of  same  un-named  reason  why  American  flag  ships 
cannot  hope  to  compete  with  foreign  flag  ships  unless  heavily  subsidized.  Some 
thought  the  Government  ought  to  charter  or  lease  its  vessels  to  private  operators, 
saying  that  the  ships  might  be  susceptible  of  profitable  operation  under  the 
American  flag  for  three  or  four  years  while  abnormal  conditions  exist,  but  that 
after  that  time  the  Government  would  be  obliged  either  to  guarantee  a  return 
of  five  or  six  per  cent  to  the  operators,  or  else  would  have  to  sell  the  vessels 
into  foreign  registry.  Others  thought  if  it  were  understood  that  the  La  Follette 
Seaman's  Act  would  be  repealed;  the  steamboat  inspection  regulations  revised, 

6 


and  a  subsidy  of  some  sort  were  guaranteed,  it  might  be  possible  to  sell  the 
Government  ships.  In  this  event,  however,  the  Government  must  be  reconciled 
to  the  sacrifice  of  more  than  a  billion  dollars,  of  construction  expenditure,  for 
the  ships  would  have  to  be  sold  at  not  more  than  half  their  average  cost,  or 
about  $100  a  deadweight  ton.  Otherwise  they  could  not  hope  to  compete  with 
foreign  ships,  many  of  which  are  carried  on  their  owners  books  at  $20  or  $30 
a  deadweight  ton. 

I  cite  these  suggestions  and  recommendations  in  detail  chiefly  to  show  the 
prevalent  habit  of  accepting  conditions  as  stated  simply  because  for  many  years 
they  have  been  so  stated.  It  is  quite,  difficult  to  understand  why  our  shipping 
people  if  truly  American  continue  to  argue  against  our  ability  to  operate  in  com- 
petition. Two  of  the  most  striking  characteristics  of  the  letters  I  received  were 
the  apparent  absorption  of  the  writers  in  operating  details,  and  the  obvious  dis- 
inclination to  dig  below  the  surface  of  the  problem.  For  instance,  the  expressed 
fear  of  competition  from  ships  carried,  on  owner's  books  at  $20  or  $30  a  ton  is 
wholly  without  justification.  A  vessel  which  had  been  written  down  to  that 
figure  would  be  old  and  worn,  costly  to  operate,  often  laid  up  for  repairs,  and 
not  at  all  comparable  with  a  new  modern  ship,  economical  to  operate,  and  having 
a  long  life  of  usefulness  in  prospect.  Such  an  argument  is  the  last  thing  one 
would  expect  to  hear  from  a  steamship  man  at  this  time  when  every  shipowner 
in  the  world  is  at  his  wits'  ends  for  time  and  shop  facilities  with  which  to  re- 
condition his  vessels  after  the  continuous,  hard,  racking  service  to  which  they 
have  been  held  and  driven  during  the  war. 

I  confess  it  caused  me  to  experience  a  feeling  of  exasperation  which  led  me 
to  ask  my  associates  and  myself  what  on  earth  could  be  the  matter  with  these 
people  who  kept  going  around  and  around  in  circles,  never  getting  anywhere. 
They  claimed  that  their  industry  was  a  great  one,  and  that  it  was  a  national 
necessity  because  it  made  large  sums  of  money  for  many  other  industries ;  and  in 
this  we  all  agreed  with  them.  Yet  in  the  same  breath  they  solemnly  averred  they 
could  not  make  money  for  themselves,  or  even  stand  on  their  own  feet  without 
Government  aid. 

It  seemed  to  me  that  this  story  had  a  familiar  ring — a  sort  of  timbre  which 
I  had  heard  in  other  countries  besides  the  United  States — and  straightway  I 
began  to  wonder  if  it  were  possible  that  somewhere,  way  back  in  the  history 
of  ocean  transportation,  the  merchant  marines  of  the  world  had  fallen 
under  some  extraneous  influence  which  had  slowly,  insidiously  and  impartially 
strangled  them  all.  I  had  seen  so  many  unsound  and  illogical  things  accepted 
and  taken  for  granted  in  this  strange  industry  that  I  could  understand  how  it 
might  be  possible  for  creeping  paralysis  of  this  sort  to  develop  indefinitely,  and 
still  remain  unidentified. 

7 


GETTING  DOWN  TO  FUNDAMENTALS. 

The  only  extraneous  influence  which  can  affect  the  merchant  marines  of 

v 

all  nations  alike  is  the  combination  of  vessel  classification  and  marine  insurance. 
So  I  resolved  to  go  back  and  search  in  history  for  the  point  at  which  a  single 
little  sailing  ship  ceased  to  make  snug1  fortunes  for  her  owner  and  his  merchant 
patrons  in  twenty  or  thirty  voyages,  and  at  which  the  present  era  of  Govern- 
ment subsidies  for  large  fleets  of  powerful  steamships  began.  A  comparison  of 
the  marine  insurance  practices  of  the  two  periods  might  prove  interesting. 

In  the  days  when  the  ships  of  Florence,  Venice,  Pisa  and  Aries  traded  with 
Africa  and  the  Levant  there  was  no  such  thing  as  organized  marine  insurance. 
Each  vessel  was  an  entity  in  itself;  each  voyage  a  venture  in  which  shipowner 
and  shipper  of  goods  were  regarded  as  partners.  If  a  ship  were  knocked  down 
in  a  gale  and  it  proved  necessary  to  cut  away  the  masts  in  order  to  save  the 
ship  and  cargo,  all  concerned  contributed  toward  re-conditioning  the  vessel, 
each  in  proportion  to  his  financial  interest  in  the  venture.  In  like  manner  all 
concerned  contributed  to  pay  for  cargo  jettisoned  in  order  to  save  the  ship. 
The  practice  was  based  on  the  theory  that  the  one  partner  had  sacrificed  part  of 
his  property  in  the  interest  of  all,  and  that  therefore  all  should  be  assessed 
equitably  to  make  good  the  loss.  The  assessment  was  called  a  "general  average", 
"average"  being  a  corruption  of  a  Florentine  word  meaning  loss.  If,  on  the  other 
hand,  a  mast  and  its  sail  were  blown  away  because  of  mismanagement,  or  any 
inherent  weakness,  or  if  a  sea  boarded  the  vessel  and  damaged  the  cargo  be- 
longing to  any  one  merchant,  the  circumstance  was  regarded  as  a  matter  of 
bad  luck  and  the  loss  lay  where  it  fell.  Such  a  loss  was  known  as  a  "particular 
average,"  and  the  person  who  sustained  it  bore  it  all.  There  was,  of  course, 
no  provision  to  protect  from  total  loss. 

This  system  was  far  from  complete  and  far  from  satisfactory.  Still,  it  is  well 
worth  study,  not  only  because  under  it  ocean  trade  grew  and  prospered,  but 
also  because  it  left  the  shipowner  and  the  merchant  absolutely  free  to  make  any 
voyage  they  wished  to  make;  to  handle  any  cargo  they  wished  to  handle;  to 
seize  upon  any  opportunity  which  presented  itself;  to  establish  communication 
with  and  develop  the  resources  of  any  new  country,  and  generally  to  utilize  all 
the  initiative,  enterprise  and  salesmanship  they  possessed.  It  is  a  matter  for 
regret  and  grave  consideration  at  this  time  that  the  same  thing  cannot  be  said 
of  the  marine  insurance  system  under  which  the  merchant  marines  of  the 
world  operate  today. 

MARINE  INSURANCE,  ANCIENT  AND  MODERN. 

Modern  marine  insurance  is  a  development,  and  its  rules  and  practices  can- 
not in  any  sense  be  regarded  as  the  product  of  design.  It  originated  at,  or  rather 
crystallized  about,  the  London  Lloyds  as  naturally  as  the  practice  of  ship  classi- 
fication for  insurance  purposes  developed  in  the  same  manner  and  at  the  same 

8 


place  under  the  name  of  Lloyds  Register  of  Shipping.  The  British  Lloyds  com- 
panies and  groups  are  said  to  write,  or  to  participate  in  writing,  more  than  70 
per  cent  of  the  marine  insurance  of  the  world.  The  marine  insurance  organi- 
zations of  the  other  maritime  nations  are  modeled  closely  after  the  British 
Lloyds,  and  several  of  them  bear  similar  names.  They  even  use  the  British 
Lloyds  forms  and  actuarial  data,  just  as  the  German  Lloyds,  the  French  Societe 
Veritas,  the  American  Bureau  of  Shipping  and  other  classification  societies  have 
adopted,  in  many  cases  verbatim,  the  scantlings  and  other  superstructural 
requirements  prescribed  for  vessels  by  the  British  Lloyds  Register  of  Shipping. 
Thus,  it  is  plain  why  classification  and  insurance  practice  is  uniform  all  over  the 
world,  and  that  no  matter  who  actually,  writes  any  given  marine  policy,  the  form, 
terms  and  limitations  of  all  policies  covering  similar  vessels  and  similar  voyages 
are  substantially  the  same. 

It  is  a  matter  of  common  knowledge  that  modern  marine  insurance  is 
purely  a  financial  enterprise  conducted  solely  with  the  idea  of  collecting  a 
maximum  of  premiums  while  paying  a  minimum  of  losses.  Premiums  collectible 
and  losses  payable  are  based  upon  an  arbitrary  insurance  valuation  set  upon 
the  vessel  insured,  the  premiums  varying  with  the  age  and  condition  of  the 
vessel  and  with  the  trade  in  which  she  is  engaged.  Whether  the  vessels  are 
busy  developing  trade  and  making  money,  or  whether  barely  eke  out  an  existence 
is  of  no  consequence  to  the  insurance  companies.  They  are  no  more  interested 
in  stimulating  the  business  of  the  merchant  marine  than  they  are  in  stimulating 
the  business  of  the  many  manufacturing  and  warehouse  enterprises,  whose  prop- 
erty on  shore  the  same  companies  stand  ready  to  insure  against  fire,  lightning, 
etc.,  as  readily  as  they  insure  vessels  against  marine  perils. 

Of  course  the  basis  for  all  this  insurance,  and  for  the  ship  classification 
upon  which  it  rests,  is  the  actuarial  record  of  past  performances.  This  actuarial 
record  dates  back  through  several  centuries,  during  which  each  disaster  has 
been  analyzed,  cross-analyzed,  listed,  averaged  and  totaled,  while  of  the  millions 
of  successful  voyages  there  is  no  record  whatever.  Consequently,  it  is  natural 
to  expect  that  the  marine  insurance  system  under  which  the  merchant  vessels 
of  the  entire  world  operate  today  would  be  retrospective  and  conservative  in 
the  extreme,  if  not  actually  obstructive  to  progress. 

INFLEXIBILITY  OF  REQUIREMENTS. 

As  a  matter  fact,  the  rigidity  and  backward-looking  character  of  the  classi- 
fication and  insurance  requirements  are  amazing.  During  the  war  there  was 
not  enough  anchor  chain  to  equip  all  the  emergency  vessels  in  conformity  with 
classification  requirements,  and  there  were  not  enough  anchors  to  provide  each 
ship  with  a  spare  bower.  The  anchor  and  chain  requirements  of  the  classifica- 
tion societies  were  based  upon  what  was  considered  necessary  in  the  olden  days 

9 


when  ships  did  not  often  lie  alongside  wharves,  and  when  lofty  spars  stopped 
the  wjnd  and  made  holding  difficult — when  a  ship  lying  at  anchor  in  a  gale  had 
no  engines  with  which  she  could  steam  up  to  her  anchors. 

Nevertheless,  after  prolonged  negotiations,  the  classification  societies  made 
only  slight  concessions  in  the  chain  requirements,  and  while  the  American 
Bureau  of  Shipping  finally  permitted  the  omission  of  the  long-obsolete  spare 
bower  anchor,  Lloyds'  Register  of  Shipping  steadfastly  refused  to  do  so. 

Nothing  short  of  the  war-time  necessities  of  England  and  the  United  States 
ever  could  have  secured  these  slight  concessions  from  the  iron-clad  dictates  of 
the  past  which  bind  every  steamship  owner  in  the  world  hand  and  foot.  Ninety 
per  cent  of  the  anchor  chain  carried  by  merchant  vessels  never  sees  the  light  of 
day  except  when  roused  up  on  deck  for  its  annual  coat  of  asphaltum  paint.  Yet 
the  shipowner  may  sigh  in  vain  for  the  opportunity  to  carry  some  revenue- 
earning  cargo  in  the  space  where  several  tons  of  this  excess  baggage  are 
stowed.  The  voice  of  the  past  says  "No,"  and  that  is  final.  Personally,  I  am 
curious  to  see  how  soon  the  marine  insurance  people  will  veto  the  war  conces- 
sions of  the  classification  societies  and  send  the  private  owners  of  some  of  our 
emergency  ships  into  the  market  inquiring  for  chain  and  anchors.  The  matter 
has  not  yet  come  before  them  because  so  long  as  the  vessels  remain  the  property 
of  the  Government  the  Shipping  Board  insures  them  in  its  own  fund. 

However,  the  restrictions  under  which  ship  construction  labors  are  not 
so  important  as  those  universally  imposed  upon  ship  operation.  For  example, 
a  vessel  with  the  highest  classification  rating  may  be  engaged  in  lifting  cargo 
from  a  Pacific  port  to  Vladivostok.  Late  in  the  season  she  may  have  an  oppor- 
tunity to  pick  up  a  return  cargo  at  Petropavloski.  If  she  has  a  wooden  rudder- 
stock,  or  if  her  forward  frames  are  spaced  further  apart  than  the  ancient 
requirements  for  an  ice-breaker  prescribe,  the  insurance  company  will  not 
permit  her  to  venture  into  the  Bering  Sea.  Many  years  may  have  elapsd 
since  the  insurance  companies  have  lost  money  on  a  vessel  engaged  in  such 
a  voyage,  and  meanwhile  much  progress  may  have  been  made  in  taking  meter- 
ological  observations  and  in  detecting  the  proximity  of  ice-fields.  The  insurance 
loss  is  remembered,  and,  because  the  insurance  business  is  purely  an  actuarial 
financial  institution,  out  of  touch  and  unsympathetic  with  merchant  marine 
enterprise,  the  progress  made  by  the  science  of  navigation  is  ignored.  Instead 
of  being  allowed  to  make  additional  money,  the  vessel  will  be  obliged  to  make 
a  costly  return  voyage  in  ballast. 

THROTTLING  EFFECT  OF  MODERN  MARINE  INSURANCE. 

To  anyone  who  wants  more  light  on  this  subject  I  recommend  the  persual 
of  a  dozen  or  so  marine  insurance  policies,  or  the  charter  parties  based  upon 
them,  selected  at  random.  These  documents,  issued  to  the  ordinary  cargo 
vessels,  which  constitute  the  backbone  and  mainstay  of  ocean  transportation, 

10 


provide  that  the  vessel  may  cruise  in  certain  oceans,  seas,  bays  and  rivers  only 
at  certain  seasons  of  the  year;  that  she  is  not  to  enter  certain  other  bodies  of 
water  at  all,  and  that  she  is  warranted  not  to  go  north  of  a  certain  parallel 
of  north  latitude  or  south  of  a  certain  parrallel  of  south  latitude  at  any  time 
or  in  any  circumstance. 

A  moment's  reflection  will  suffice  to  show  that  the  tendency  of  these 
restrictions  is  to  standardize  ocean  trade  routes  and  to  force  all  vessels  to 
adhere  closely  to  these  routes.  Such  an  arrangement  may  have  its  advantages 
from  the  insurance  point  of  view,  which  regards  safety  as  the  main  object  in 
life.  But  it  is  not  so  advantageous  from  the  shipowner's  point  of  view.  Stand- 
ardized ocean  routes  means  also  a  corresponding  standardization  of  ocean 
termini,  or  the  crowding  into  a  few  ports  of  the  trade  which  otherwise  would 
be  distributed  among  many  ports.  This,  in  turn,  means  slow  turn-around, 
unnecessarily  keen  competition  and  unnecessarily  reduced  revenue.  A  ship- 
owner naturally  will  cut  freight  rates  if  by  doing  so  he  can  stay  in  the  route 
where  he  is  and  avoid  being  forced  to  trade  with  a  port  to  and  from  which 
his  fuel  and  other  operating  costs  may  be  considerably  increased,  or  for  the 
privilege  of  trading  with  which  he  may  have  to  pay  a  much  higher  insurance 
premium  on  his  vessel.  The  owners  of  some  tramp  steamers — the  type  of 
vessel  which  always  is  the  pioneer  of  trade — have  told  me  they  would  like  to 
establish  trade  with  a  number  of  undeveloped  parts  of  the  world,  but  that  they 
are  absolutely  estopped  by  the  refusal  of  the  insurance  companies  to  under- 
write their  vessels  on  any  terms  if  they  contemplate  entering  harbors  which 
are  not  well  charted  and  buoyed,  and  which  do  not  afford  full  protection  in 
bad  weather. 

FINANCIAL  DECADENCE  OF  SHIP  OPERATION  EXPLAINED. 

The  universal  development  and  steady  tightening  of  these  restrictions 
over  a  long  period  of  years  are  in  themselves  sufficient  to  explain  much,  and 
perhaps  most,  of  the  steady  decrease  in  ship  earnings  which  has  occurred  during 
the  last  century.  The  remainder  probably  has  been  absorbed  by  the  increased 
cost  of  ships  and  of  ship  operation,  which,  like  the  property  and  operation  costs 
of  other  industries,  have  risen  rapidly  during  the  last  thirty  or  forty  years. 
Moreover,  while  the  prices  of  manufactured  commodities  have  been  steadily 
advancing,  the  tendency  of  ocean  freights,  up  to  the  beginning  of  the  war,  has 
been  rather  in  the  opposite  direction. 

But  this  is  not  the  whole  story.  Superimposed  upon  the  classification  and 
insurance  restrictions  has  been  the  heavy  burden  of  universal  overcapitalization. 
This  process  began  when  the  steamship  companies  were  hard  pressed  during 
the  trade  slump  which  followed  the  panic  of  1873.  Very  few  companies  seem 
to  have  escaped  overcapitalization,  and  most  of  the  new  ones  seem  to  have 
been  systematically  "watered"  almost  as  soon  as  they  sprang  into  existence. 

11 


I  have  before  me  a  200-page  analysis  of  the  annual  financial  statements 
of  representative  steamship  companies  of  all  nations  covering  a  period  of 
twenty  years.  The  collator  remarks  that  many  of  the  statements  seem  to  have 
been  prepared  with  the  idea  of  showing  the  position  of  the  company  "as  it  is 
not."  However,  practically  all  of  them  whose  statements  are  sufficiently  com- 
plete to  admit  of  intelligent  interpretation  show  degrees  of  overcapitalization 
indicating  that  they  are  obliged  to  find  money  to  pay  dividends  on  stock  issues 
which  are  from  ten  to  forty  per  cent  in  excess  of  all  the  property  value  they  can 
show.  A  recent  statement  of  one  American  company  frankly  admitted  that 
its  capitalization  of  $11,000,000  consisted  of  $5,000,000  in  "tangible  assets"  and 
$6,000,000  of  "good-will." 

In  the  classification,  insurance  and  capitalization  conditions  I  have  just 
described  I  feel  convinced  that  I  see  a  real,  deep-rooted  and  fundamental 
reason  why  the  merchant  marines  of  the  world,  the  instruments  for  the  promo- 
tion of  overseas  trade  and  the  creators  of  wealth  for  other  industries,  find 
themselves  incapable  of  making  a  living  for  themselves.  After  more  than  a 
century  of  slow,  progressive  strangulation  of  extraneous  influences,  and  a 
half-century  of  effort  to  earn  returns  on  values  which  do  not  exist,  I  am  not 
surprised  to  see  the  great  merchant  marines  of  the  world,  ignorant  of  what 
really  ails  them,  huddled  and  inert,  like  so  many  statues  of  Buddha,  sitting 
with  upturned  palms,  before  the  public  treasuries  beseeching  national  aid. 
I  consider  this  aspect  of  the  matter  infinitely  more  important  than  the  La  Fol- 
lette  Seaman's  Act,  the  tonnage  measurement  rules,  the  seamboat  inspection 
regulations  and  the  other  operating  details  which  are  mere  surface  excrescenses. 
And  it  is  along  these  lines,  rather  than  upon  what  the  steamship  authorities  have 
told  me,  that  my  associates  and  I  developed  the  plan  of  ownership  and  operation 
which  the  U.  S.  Shipping  Board  has  officially  recommended  to  Congress. 

GROPING  FOR  A  REMEDY. 

I  do  not  wish  it  understood  that  I  advocate  embarking  upon  a  Quixotic 
knight-errant  crusade  to  reform  the  long-established  ship  classification  and 
marine  insurance  practices  of  the  world.  I  know  too  well  the  futility  of 
attempting  to  teach  so  old  an  animal  new  tricks.  Moreover,  I  do  not  claim 
sufficient  familiarity  with  the  technicalities  of  the  business  to  presume  to  say 
exactly  what  the  new  tricks  should  be.  I  admit  that  a  certain  amount  of  insur- 
ance restriction  is  necessary  and  proper,  but  I  do  not  believe  this  restriction 
should  be  one-sided.  I  believe  that  enterprise  at  sea  should  enjoy  more  freedom 
of  action  than  it  has  enjoyed  for  at  least  a  generation;  that  a  shipowner  should 
be  able  to  get  hull  and  machinery  insurance  for  any  voyage  he  wishes  to  under- 
take, and  that  he  should  have  his  insurance  under  reasonable  conditions  and 
on  reasonable  terms,  just  as  a  manufacturer  or  merchant  on  shore  can  get  insur- 
ance for  his  property,  no  matter  what  his  business,  on  terms  which  are  not  so 
prohibitive  as  to  cause  him  to  abandon  the  venture. 

12 


This  can  never  be  accomplished  until  we  have  some  marine  insurance 
companies  which  do  not  adhere  rigidly  to  and  depend  absolutely  upon  the 
acturial  records  of  the  past,  but  which  make  themselves  familiar  with  the 
business  of  the  modern  shipowner,  and  work  in  sympathy  with  the  aspirations. 
Such  a  state  of  affairs  actually  exists  on  shore,  where  the  underwriter  and 
the  insured  are  in  daily  touch  with  one  another,  and  where  competition  is 
keen.  At  this  time,  when  we  Americans  find  ourselves  called  upon  to  build  up 
a  brand-new  marine  insurance  business  of  our  own,  I  see  no  reason  why  we 
should  not  ignore  the  backward-looking  methods  of  the  rest  of  the  world  and 
build  along  sound,  progressive  lines. 

POSSIBLE  SOLUTIONS  OF  THE  PROBLEM. 

This  task  is  not  one  which  the  Government  can  properly  undertake,  except 
possibly  to  emphasize  the  importance  of  having  liberal  American  insurance 
for  American  ships  and  cargoes.  It  seems  rather  to  be  the  duty  of  the  steam- 
ship owners,  the  American  classification  society  and  the  American  companies 
who  write,  or  wish  to  write,  American  marine  insurance.  The  Shipping  Board 
plan  provides  the  machinery  for  starting  such  co-operative  action  through  the 
Association  of  Steamship  Directors,  which  it  would  have  meet  quarterly  in 
Washington  to  compare  notes  and  experiences,  and  to  discuss  merchant  marine 
problems  with  the  Government. 

If  all  else  fails,  and  a  real,  progressive  American  marine  insurance  busi- 
ness fails  to  develop,  the  steamship  companies  will  still  be  free  to  create,  among 
themselves  a  common  marine  insurance  fund,  administered  by  themselves,  into 
which  they  all  pay  their  premiums,  and  from  which  they  pay  all  their  losses. 
For  the  last  two  years  the  Shipping  Board  has  demonstrated  the  practicability 
of  such  a  plan  under  much  more  difficult  conditions  than  obtain  today.  The  proc- 
ess was  more  like  taking  money  from  one  pocket  and  putting  it  into  another  than 
anything  else.  Nevertheless,  although  the  rate  charged  was  consistently  about 
three-quarters  of  the  prevalent  commercial  premium,  the  plan  furnished  full 
protection  against  marine  loss,  and  left  about  enough  surplus  to  pay  overhead 
expenses,  all  without  touching  a  dollar  appropriated  by  Congress. 

The  urgent  and  immediate  necessity  for  American  shipowners  and  pros- 
pective shipowners  to  consider  seriously  and  carefully  the  establishment  of 
an  independent  American  marine  insurance  system  at  this  time  is  further 
shown  by  the  agitation  for  higher  rates  on  all  forms  of  marine  policies  which 
began  in  London  last  autumn,  and  has  now  spread  to  all  the  maritime  countries 
of  the  world.  The  marine  insurance  business,  unlike  any  other  business,  never 
takes  a  loss.  If  it  experiences  a  bad  year  it  raises  rates  and  recoups  next 
year — and  the  steamship  companies  pay  the  bill.  The  chief  cause  of  the 
present  agitation  for  increased  rates  is  the  accumulation  of  unexecuted  repairs 
brought  about  by  the  inadequacy  of  existing  repair  yard  and  drydock  facilities. 

13 


No  doubt  the  extraordinarily  hard  driving  to  which  the  fleets  engaged  in  the 
trans- Atlantic  trade  have  been  subjected  during  the  war  has  rolled  up  an 
imposing  total  of  repair  claims.  It  is  for  the  purpose  of  meeting  these  claims 
without  reducing  their  own  profits  that  the  marine  insurance  companies  are 
co-operating  to  raise  the  cost  of  marine  insurance  for  an  indefinite  period  to 
shipowners  all  over  the  world,  no  matter  whether  their  ships  participated  in 
the  repairs  or  are  new  ships  which  may  not  contract  a  single  repair  bill  for 
several  years. 

In  his  recent  address  to  the  Eagle,  Star  and  British  Dominions  stockholders, 
Sir  Edward  Mountain,  a  great  power  in  the  marine  insurance  world,  spoke  of 
these  accumulated  repair  bills,  admitted  that  their  payment  in  a  lump  sum 
cannot  be  avoided,  and  urgently  besought  the  co-operation  of  steamship  owners 
to  keep  the  cost  of  the  repairs  down  to  the  lowest  level  possible.  At  the  same 
time,  he  described  and  deplored  the  practice  of  including  in  a  marine  policy 
several  minor  extra  risks,  which  has  arisen  during  the  confusion  of  war  business, 
and  which,  until  now,  has  escaped  the  alertness  of  the  underwriters.  For 
instance,  he  said  that  shippers  and  shipowners  are  taking  advantage  of  this 
unprecedented  practice  by  using  bills  of  lading  to  contract  themselves  out 
of  liabilities  which  formerly  were  theirs,  but  which  they  now  find  they  can  pass 
along  to  the  underwriters. 

The  elimination  of  the  overcapitalization  handicap  from  the  American 
merchant  marine  is  fully  provided  for  in  the  Shipping  Board  plan.  When  we 
can  get  both  the  insurance  and  overcapitalization  handicaps  out  of  the  way  I 
expect  to  see  the  merchant  marines  of  other  countries  worrying  about  their 
ability  to  compete  with  American  ships,  and  the  arguments  about  our  inability 
to  compete  with  foreigners  will  disappear. 

ORGANIZATION  OF  STEAMSHIP  COMPANIES. 

From  a  close  study  of  world  shipping,  and  from  the  experience  of  the 
Government  since  the  slow  return  toward  commercial  conditions  began  last 
autumn,  I  am  convinced  that  ships  can  be  operated  to  maximum  advantage  only 
when  the  individual  fleets  are  of  such  size  that  the  management  can  give  care- 
ful personal  attention  to  every  detail  and  all  the  potentialities  of  each  voyage. 
I  believe,  and  all  my  colleagues  and  associates  in  the  Shipping  Board  agree 
with  me,  that  when  an  operating  organization  exceeds  this  size  its  routine 
becomes  too  complicated  and  its  reactions  too  slow;  the  comparatively  few 
big,  competent  brains  of  the  organization  do  not  have  the  time  to  bestow  the 
proper  attention  upon  the  details  and  potentialities  of  each  venture;  too  much 
of  the  planning  and  bargaining  is  left  to  relatively  inferior  subordinates  whose 
names  and  personalities  mean  nothing  to  customers,  either  at  home  or  abroad; 
profitable  business  opportunities  are  overlooked;  personal  contact  with  cus- 
tomers is  to  a  large  extent  lost,  and  many  forms  of  lost-motion  and  other  kinds 
of  wastefulness  are  certain  to  germinate,  develop  and  multiply. 

14 


Again,  I  believe,  and  my  associates  agree,  that  the  affairs  of  the  ideal 
steamship  organization  should  be  administered  by  the  most  far-seeing  and 
versatile  type  of  man  the  country  produces;  that  as  many  agricultural,  indus- 
trial, transportation  and  merchandising  industries  as  possible  should  be  repre- 
sented on  the  board  of  directors,  and  that  the  stock  ownership  should  be  widely 
distributed  among  American  citizens  of  every  occupation,  persuasion  and  school 
of  economic  thought.  Then  there  could  be  no  such  thing  as  a  steamship  interest 
separate  and  distinct  from  every  other  interest;  farm,  factory,  ship  and  mer- 
chant would  always  be  working  together  in  the  common  national  interest;  and, 
by  the  same  token,  their  acts  would  always  be  responsive  to  and  would  always 
enjoy  the  support  of  national  popular  opinion. 

It  has  been  argued  that  such  cosmopolitan  composition  of  operating  com- 
panies might  lead  to  more  or  less  frequent  sacrifices  of  steamship  profits  in 
favor  of  promoting  foreign  trade  schemes,  but  I  think  this  objection  is 
answered  by  the  fact  that  the  officers  of  the  organization  would  have  steamship 
responsibilities  to  which  they  would  be  bound  to  give  weighty  consideration, 
even  if  it  were  not  for  the  circumstance  that  the  interest  of  the  steamship 
business,  as  such,  is  inextricably  interwoven  with  the  expansion  of  foreign 
trade,  and  therefore  the  steamship  company  would  be  more  likely  ultimately 
to  gain  than  to  lose  through  any  such  concession  that  may  be  made. 

In  this  connection  it  is  worth  while  to  note  that  a  new,  apparently  suc- 
cessful and,  in  its  present  form,  a  distinctly  American  steamship  development 
is  the  ownership  and  operation  of  vessels  by  companies  which  use  those  vessels 
exclusively  for  the  purpose  of  distributing  and  marketing  their  own  products. 
The  U.  S.  Steel  Corporation  and  the  Standard  Oil  Company  furnish  conspicuous 
examples  of  this,  and  I  am  told  that  for  the  purpose  of  insuring  efficiency,  the 
sales  departments  of  these  companies  deal  with  the  marine  departments  on  a 
scrupulously  strict  business  basis,  so  that  if  it  were  desired  at  any  time  to 
divorce  the  marine  department  from  the  rest  of  the  business,  that  department 
would  be  entirely  self-contained,  self-supporting  and  capable  of  earning  a 
profit. 

NEW  CONDITIONS   TO  BE  RECKONED   WITH. 

I  do  not  wish  to  hazard  any  prophecy  about  the  extent  to  which  this 
innovation  may  be  expected  to  develop,  or  about  the  effect  it  may  be  expected 
to  have  upon  the  independent  steamship  owner.  Oil  tankers  can  never  become 
serious  competitors  for  return  cargoes  because  the  variety  of  the  merchandise 
they  can  carry  is  narrowly  limited.  The  cargo  steamer  which  carries  its  owners' 
own  products  abroad,  however,  is  a  different  proposition.  Still,  I  believe  that 
the  modern  thirst  for  returns  from  by-products  is  so  great  that  such  a  steamer 
would  not  be  likely  to  cut  rates  unless  faced  with  the  alternative  of  returning 
home  in  ballast, 

15 


In  any  event,  here  is  a  new  state  of  affairs  in  the  steamship  world  which 
undoubtedly  will  extend,  and  which  must  be  reckoned  with  and  allowed  for 
accordingly.  Moreover,  it  is  natural  to  expect  that  the  cue  given  by  this 
development  will  be  taken  up  by  other  industries,  and  that  to  some  extent 
combinations  of  manufacturers  and  merchants  having  similar  interests  and 
important  trade  connections  in  the  same  foreign  country  will  seek  to  further 
those  interests  through  stock  ownership  in  the  steamship  companies  which 
carry  their  goods. 

Personally,  I  see  no  objection  to  such  a  tendency.  Undoubtedly  it  will 
stimulate  the  establishment  of  American  steamship  companies,  cause  them  to 
gravitate  quickly  into  regular  trade  routes  where  plenty  of  business  awaits 
them,  and  at  the  same  time  it  will  make  the  steamship  companies  sympathetically 
responsive  to  the  needs  of  the  country's  trade.  These  should  be  our  main 
objectives  at  the  present  time.  I  am  not  apprehensive  that  the  manufacturing 
and  merchandising  elements  will  ever  be  able  to  make  the  steamship  companies 
serve  their  own  selfish  ends  to  the  detriment  of  independent  stockholders  who 
expect  dividends  fromi  steamship  profits,  because,  apart  from  the  reliance  which 
must  be  placed  upon  the  intelligence  of  steamship  stockholders  and  steamship 
managements,  the  Shipping  Board  plan  contemplates  careful  Government  super- 
vision of  the  issue  and  transfer  of  steamship  securities. 

ALL  MUST  CO-OPERATE. 

I  have  already  indicated,  and  I  wish  now  to  emphasize,  my  conviction 
that  no  empirical  policy  laid  down  by  the  Government,  no  matter  how  complete, 
sound  and  well  co-ordinated,  can,  by  itself,  be  expected  to  vouchsafe  to  the 
American  people  the  establishment  of  the  magnificent  economic  mechanism  they 
justly  demand  that  the  American  merchant  marine  shall  be.  The  Government 
policy  endorsed  by  Congress  will  simply  be  the  reflected  composite  of  the  wishes 
and  aspirations  of  the  country.  As  such  it  will  be  the  cue  which  the  American 
steamship  operators,  the  American  marine  insurance  men,  the  American  classi- 
fication society,  the  American  terminal  companies  and  the  American  exporters 
and  importers  should  take  up  in  formulating  their  policies,  all  of  which,  of 
course,  must  be  consistent  and  consonant  with  one  another,  and  so  moulded 
that  they  will  work  smoothly  and  harmoniously  under  the  Government  plan. 

A  SURVEY  OF  MATERIAL. 

Before  describing  the  Shipping  Board  plan  of  ownership  and  operation, 
I  believe  it  will  be  helpful  if  I  sketch  an  outline  of  the  material  with  which 
we  shall  have  to  work. 

Our  fleet  will  aggregate  almost  fourteen  million  deadweight  tons.  The 
last  vessels  are  due  for  delivery  in  February  or  March,  1921.  The  ships  are 
good,  strong  ones,  of  much  better  quality,  equipment  and  finish  than  the  cargo 

16 


vessels  of  Europe.  But  the  fleet  as  a  whole  is  seriously  out  of  balance.  That 
is,  we  have  too  many  small,  slow  coal-burning  ships,  and  too  few  large,  fast 
oil-burners.  We  can  get  along  without  many  palatial  ocean  greyhounds  for  the 
present,  but  the  derth  of  good,  serviceable  combination  passenger  and  cargo 
vessels  is  deficiency  which  we  should  correct  as  soon  as  possible. 

I  have  no  apology  to  make  for  this  condition.  Our  program  was  laid 
out  at  the  end  of  a  week  in  which  the  Germans  had  destroyed  forty  allied 
merchantmen,  and  seemed  in  a  fair  way  to  make  good  their  boast  that  soon  they 
would  be  destroying  sixty  a  week.  The  greatest  world  need  of  the  moment 
was  ships  of  any  size  and  description  that  could  carry  supplies  to  our  armies 
and  to  the  armies  of  our  allies.  There  was  no  time  and  no  disposition  to  stop, 
plan  and  create  facilities  for  building  a  fleet  which  would  be  ideal  for  com- 
mercial use  after  the  war.  We  simply  went  ahead  finishing  whatever  had  been 
laid  down,  and  multiplying  as  rapidly  as  possible  our  facilities  for  building  the 
types  of  ships  we  were  equipped  to  build  with  least  delay. 

THE  BALANCING  OF  THE  FLEET. 

It  happens,  however,  that  our  headlong  production  of  ships  which  are  now 
superfluous  not  only  enabled  our  country  to  accomplish  its  military  purpose, 
but  also  placed  in  our  hands  the  means  for  balancing  the  fleet  from  which  we 
wish  to  create  a  permanent  American  merchant  marine.  The  Shipping  Board 
proposes  to  sell  to  citizens  of  foreign  nations,  at  prices  not  less  than 
construction  costs,  such  coal-burning  cargo  vessels  as  we  do  not  need,  using  the 
proceeds  of  such  sales  to  construct  as  rapidly  as  possible  in  American  yards 
the  larger,  faster  oil-burning  passenger-and-cargo  vessels  which  we  need. 

The  exact  tonnage  we  can  profitably  spare  will  depend,  of  course,  upon  the 
extent  to  which  our  people  go  in  for  tramp  steamer  ventures,  engaging  in  the 
transportation  of  cargoes  back  and  forth  between  foreign  countries,  and  touch- 
ing at  American  ports  only  incidentally,  or  at  long  intervals,  when  extensive 
repairs  are  needed.  If  much  of  this  sort  of  business  develops  we  shall  not  have 
so  many  superfluous  small  cargo  vessels  as  at  present  seems  indicated. 

WHAT  THE  SHIPPING  BOARD  HAS  RECOMMENDED  TO  CONGRESS. 

The  Shipping  Board  recommends  private  ownership  and  operation  as  the 
fundamental  policy  for  commercial  shipping.  The  Government  should,  there- 
fore, contemplate  retirement  from  commercial  shipbuilding,  ship-owning  and 
ship-operating  activities  at  the  earliest  date  which  may  be  convenient  and 
practical  in  order :  first,  to  give  our  overseas  trade  the  full  benefit  of  competitive 
service;  second,  to  leave  steamship  operators  free  to  render  this  competitive 
service,  and,  third,  to  impart  to  present  and  prospective  steamship  operators 
that  confidence  which  they  must  feel  before  they  can  be  expected  to  invest 

17 


their  money  in  existing  ships,  and  to  place  the  orders  for  new  ships  without 
which  the  outlook  for  the  American  shipbuilding  industry  will  not  be 
encouraging. 

PLAN  OF  ACTION. 

In  order  to  carry  out  this  policy,  the  Government  should  construct  no 
more  ships,  other  than  those  now  in  the  program,  except  such  new  vessels  as 
may  be  needed  to  balance  the  fleet,  and  for  the  construction  of  which  funds  may 
be  provided  by  sales  of  superfluous  ships  to  foreigners.  It  should  adopt,  and 
rigidly  adhere  to,  a  definite  plan  for  selling  its'  ships. 

Obviously  it  will  be  impossible  to  sell  the  whole  fleet  at  once;  but  during 
the  period  in  which  the  ships  are  being  sold  it  is  essential  that  the  Government 
handle  the  unsold  ships  in  a  manner  which  will  not  permit  their  operation  to 
react  unfavorably  upon  the  operation  of  the  ships  which  have  been  sold,  and 
will  definitely  tend  to  stimulate  the  purchase  of  more  ships  by  private  operators. 

This  double  purpose  can  be  served  by  assigning  unsold  ships  to  managers 
and  operators,  as  has  been,  and  still  is,  the  practice  of  the  Shipping  Board. 
The  operation  of  ships  through  the  medium  of  operators  and  managers  should 
not  react  unfavorably  upon  the  operation  of  privately-owned  ships  because, 
under  present  conditions,  only  flagrant  mismanagement  in  the  distribution  of 
ships  by  the  Government  would  be  likely  to  cause  overberthing  in  any  trade 
route. 

At  the  same  time,  these  methods  of  operation  will  enable  the  Government 
to  take  care  of  its  ship  investment  while  any  ships  remain  in  its  hands,  because 
the  difference  between  the  earnings  of  the  ships  and  the  fees  paid  to  the  man- 
agers and  operators  is  paid  into  the  Government  operating  fund.  These 
moneys  will  be  available  for  depreciation,  insurance,  operating  charges  (includ- 
ing organization  overhead)  and  the  many  other  liabilities  a  shipowner  should 
always  be  prepared  to  cover  with  earnings. 

This  method  of  operating  the  unsold  ships  also  will  place  in  the  hands  of 
the  Government  a  mobile  tonnage  reserve  peculiarly  well  suited  for  use  in 
opening  and  developing  new  avenues  and  fields  for  American  commerce.  Not 
only  will  it  permit  the  development  of  new  business  and  new  steamship  routes 
with  great  ease,  it  will  also,  and  at  the  same  time,  develop  the  competent 
operators,  familiar  with  the  routes,  who  will  buy  the  vessels  as  soon  as  condi- 
tions warrant  the  sale  of  the  fleets  which  have  been  established  in  the  new 
routes. 

We  do  not  anticipate  the  establishment  and  development  of  new  trade 
routes  in  this  manner  will  involve  any  expenditure  of  Government  money.  We 
feel  that  a  surplus  of  receipts  over  expenditures  in  the  operating  fund,  together 
with  the  Merchant  Marine  Development  Fund,  described  later,  will  provide 
centralized  working  capital  adequate  to  finance  this,  national  enterprise. 

18 


TERMS  OF  SALES. 

With  these  principles  in  mind,  we  have  recommended  the  enactment  of 
legislation  which  will  empower  the  President  to  carry  on  for  as  long  a  period 
as  may  be  necessary,  after  the  expiration  of  six  months  from  the  signing  of 
peace,  the  work  which  is  now  being  done  under  his  direction  in  planning  and 
organizing,  with  the  equipment  now  at  hand,  and  that  may  hereafter  come  to 
hand,  an  adequate,  well-balanced  and  properly  co-ordinated  merchant  marine. 
Such  legislation  should  include: 

The  power  to  sell  to  American  citizens  at  the  current  world  market 
price  such  Government-owned  steel  vessels  as  the  President  may  designate  from 
time  to  time,  at  least  twenty-five  per  cent  of  the  purchase  price  being  paid  upon 
delivery,  the  remainder  falling  due  and  payable  in  graded  annual  installments 
over  a  period  not  exceeding  ten  years.  The  President  should  also  be  empowered 
to  take  and  hold  a  mortgage  for  the  unpaid  balance,  the  mortgage  bearing  inter- 
est at  the  commercial  market  rate  for  similar  mortgages,  the  rate  being  revisable 
annually. 

The  power  to  take  and  hold  such  mortgages  should  also  include  the  power 
to  dispose  of  interest  moneys  as  follows:  That  part  of  the  interest  which 
represents  payment  at  a  rate  which  fairly  reflects  the  cost  of  correspondingly 
short-term  credit  to  the  Government  should  be  paid  into  the  United  States 
Treasury.  The  difference  between  this  sum  and  the  interest  actually  paid  at  the 
commercial  rate  which  the  mortgage  carries,  representing  a  saving  the  Govern- 
ment is  able  to  effect  in  virtue  of  its  peculiar  credit  advantage,  should  be  paid 
into  a  Merchant  Marine  Development  Fund. 

The  power  to  sell  Government-owned  vessels  should  also  include  the 
power  to  sell  to  foreigners  at  prices  not  less  than  those  charged  American 
citizens,  and  on  terms  not  more  advantageous  than  those  extended  to  American 
citizens,  for  similar  vessels,  such  wood  ships  and  coal-burning  steel  ships  as 
may  be  superfluous,  or  otherwise  undesirable,  in  the  American  merchant  marine. 
Coupled  with  this  power  to  sell  to  foreigners  should  be  the  power  to  use  the 
proceeds  of  such  sales  to  build  the  vessels  the  United  States  needs  to  balance 
its  merchant  marine  as  planned,  said  new  vessels  to  be  disposed  of  in  the  same 
manner  as  other  prime  vessels  owned  by  the  Government. 

In  considering  the  effect  which  legislation  authorizing  the  sale  of  ships 
at  "the  world  market  price"  is  likely  to  have,  it  seems  advisable  to  explain 
what  we  had  in  mind  when  we  used  this  expression. 

THE  WORLD  MARKET  PRICE  FOR  SHIPS. 

In  order  to  judge  the  price  prospects  of  such  a  market,  it  is  necessary 
to  realize  that  ships  are  fluid  international  commodities,  which,  because  they 
compete  with  one  another,  irrespective  of  the  flags  they  fly,  maintain  a  remark- 
ably level  capital  value  all  over  the  world.  The  vigilance  of  shipowners  is  so 

13 


keen,  and  cable  service  is  so  quick,  that  abnormal  earning  power  in  one  trade 
route  is  destroyed  almost  as  soon  as  it  appears  by  an  inrush  of  tonnage  from 
other  routes  in  which  the  earning  power  of  ships  is  not  so  great.  With  few 
exceptions,  this  condition  is  as  true  today  while  a  world-wide  shortage  of 
tonnage  is  keeping  all  earnings  and  capital  values  high,  as  it  was  in  1913,  when 
a  world-wide  surfeit  of  tonnage  was  keeping  earnings  and  capital  values  at 
much  lower  levels. 

As  good  an  idea  as  anyone  can  form  of  the  present  and  prospective  values 
of  ships  can  be  had  from  the  following  statements  of  fact: 

In  the  first  place.,  there  is  no  question  that  the  current  charter  market, 
which  itself  is  the  product  of  many  factors,  reflects  accurately  the  momentary 
capital  value  of  ships,  although,  because  of  its  susceptibility  to  fluctuations,  it  is 
not  necessarily  a  reliable  index  to  their  investment  value.  At  present  the 
bare-boat  charter  rate  for  ordinary  cargo  vessels  is  $5  a  deadweight  ton  a 
month.  This  means  that  a  10,000-ton  ship  can  be  hired  out  at  $50,000  a  month, 
or  $600,000  a  year.  In  order  to  reach  a  conservative  valuation,  we  shall  assume 
that  this  rental  represents  as  large  an  income  as  20  per  cent.  The  indicated 
capital  value  at  the  moment,  therefore,  is  $3,000,000,  or  $300  a  deadweight  ton. 

While  no  one  would  expect  to  see  a  private  operator  bid  this  figure  unless 
the  vessel  were  peculiarly  suited  to  his  especial  need,  we  cite  this  evidence  of  the 
current  value  of  spot  delivery  tonnage  because  a  knowledge  of  it  is  necessary 
in  order  to  understand  the  situation  as  a  whole. 

At  the  other  extreme  is  the  shipbuilder's  price  for  distant  delivery  ships. 
This  figure  is  almost  entirely  independent  of  the  current  demand  for  spot  ton- 
nage, and  is  composed  of  two  principal  factors:  anticipated  construction  costs, 
and  the  desire  to  book  business  in  competition  with  other  builders.  In  England, 
where  construction  costs  were  held  down  during  the  war,  but  are  now  rising, 
the  shipbuilder's  bid  for  two  years'  delivery  ranges  between  $140  and  $160  a 
deadweight  ton,  the  buyer  agreeing  to  assume  any  increased  cost  of  labor  and 
materials.  In  the  United  States,  where  the  increased  efficiency  of  shipyard 
management  and  labor  is  lowering  construction  costs,  but  where  private  demand 
has  not  yet  developed  actively,  flat  price  offers  to  construct  for  from  $150  to 
$165  a  deadweight  ton  have  been  held  out  by  builders  for  future  delivery. 

Between  these  two  extremes,  the  value  of  tonnage  has  a  high  rather  than 
a  low  level  and  tendency — especially  spot  tonnage.  Most  of  the  world's  fleets 
were  built  before  the  war  and  during  the  first  two  years  of  the  war.  They  have 
been  driven  hard,  and  they  are  heavily  depreciated.  Their  periods  of  idleness 
while  undergoing  postponed  repairs  are  long,  and  will  become  longer.  Their 
repair  bills  are  large,  and  will  become  larger.  In  a  short  time  the  mortality 
among  them  will  be  very  great.  Practically1  the  only  ships  now  free  from  these 
handicaps  are  the  ships  built  by  the  United  States  Shipping  Board  Emergency 
Fleet  Corporation,  and  because  the  trade  of  the  world  must  be  carried  by 

20 


someone  at  some  price,  it  seems  reasonable  that  the  demand  for  ships  which 
can  be  operated  with  certainty  and  economy  should  keep  the  market  price  of 
such  ships  at  a  high,  rather  than  a  low,  figure  throughout  the  now-visible  future.. 

FIXING  THE  WORLD  MARKET  PRICE. 

From  the  foregoing  it  seems  logical  that  the  United  States  Government, 
which  is  the  only  agency  in  the  world  with  any  considerable  number  of  spot 
delivery  ships  to  sell,  will  be  very  influential  in  establishing  the  world  market 
price,  and  the  offers  made  by  our  citizens  can  reasonably  be  regarded  as  reflect- 
ing carefully  estimated  earning  power  in  the  ocean  carrying  trade,  modified,  of 
course,  by  the  buyer's  natural  desire  to  buy  as  cheap  as  he  can.  Moreover,  since 
the  completion  and  delivery  of  a  large  part  our  fleet  will  be  placed  over  1919, 
1920,  and  the  first  two  months  of  1921,  there  seems  in  this  circumstances  a 
sufficient  guaranty  that  our  sales  prices  will  always  follow  the  actual  market 
value  closely,  and  especially  that  no  tonnage  will  be  dumped  on  the  market  at 
prices  below  those  justified  by  the  economic  conditions  of  the  times  in  the  ocean 
carrying  trade. 

The  influence  which  our  Government  may  be  expected  to  exert  directly  upon 
the  prices  of  ships  in  other  countries  will  be  betteer  understood  if  one  remem- 
bers that  the  4,000,000  deadweight  tons  which  we  may  offer  for  sale  to  foreigners 
during  the  next  eighteen  months  is  equivalent  to  double  the  combined  annual 
output  of  all  the  shipyards  of  the  British  Isles  at  present. 

In  this  connection  it  is  interesting  to  note  the  sharp  upward  turn  taken  by 
the  prices  of  ships  in  England  during  the  first  quarter  of  1919,  the  records  of 
which  have  just  been  published  by  Lloyd's  Register  of  Shipping.  A  10,800  ton 
standard  cargo  vessel  built  by  the  Government  in  1908  brought  $2,114,100  or 
$195.61  a  deadweight  ton.  A  war-built  standard  steamer  of  2,980  deadweight 
tons  sold  for  437,400  or  $147  a  deadweight  ton.  During  the  last  quarter  of  1918 
the  ruling  price  for  war  built  standard  steamers  was  a  little  more  than  $100  a 
deadweight  ton.  These  figures  unquestionably  reflect  a  recognition  of  the  sound- 
ness of  the  American  prices  of  new  tonnage. 

The  Lloyd's  report  also  discloses  sharp  advances  in  the  re-sale  price  of  old 
tonnage.  The  "Reims"  a  6,000  ton  steamer  built  at  Sunderland  in  1901,  was 
purchased  in  1914  for  $100,000,  or  $16.66  a  deadweight  ton.  During  the  first 
quarter  of  1919,  the  same  vessel  brought  $325,000  or  $54.16  a  deadweight  ton, 
despite  the  fact  that  it  is  18  years  of  age  with  not  more  than  two  years'  use- 
fulness in  prospect.  The  "Quinto"  5,560  deadweight  tons,  built  in  Glasgow  in 
1900,  sold  in  1915  for  $225,000  or  $40  a  deadweight  ton.  During  the  first 
quarter  of  1919,  the  same  vessel,  although  19  year  of  age,  brought  $425,000  or 
$76  a  deadweight  ton. 

The  explanation  of  these  sharp  rises  in  the  sales  prices  of  ships  probably 
lies  in  the  withdrawal  of  Government  regulations  which,  throughout  the  war, 

21 


seem  to  have  been  framed  and  administered  with  the  idea  of  holding  down  the 
capital  value  of  tonnage.  The  occasion  for  the  sudden  relaxation  of  this  restraint 
probably  has  been  the  unlocked  for  development  that  new  ships  cannot  be  built 
in  England  for  less  than  three-and-a-half  times  their  former  cost. 

AMERICAN  INSURANCE  FOR  AMERICAN  SHIPS. 

Returning  now  to  the  terms  of  sale  which  should  be  laid  down  by  law,  the 
American  purchasers  should  be  required  to  engage  that  they  will  place,  and  keep 
placed,  if  possible,  hull  and  machinery  insurance  for  their  equity  in  the  vessels 
they  buy  with  American  Marine  insurance  companies  which  underwrite  marine 
risks  with  their  own  funds,  or  with  the  funds  of  a  group  of  American  companies, 
each  and  every  member  of  which  group  underwrites  original  marine  risks  with  its 
own  funds.  The  same  provisions  should  authorize  the  President  to  carry  in  the 
Shipping  Board  insurance  fund,  as  heretofore  and  as  at  present,  the  hull  and 
machinery  insurance  for  the  Government  equity  in  the  same  vessels,  this  insur- 
ance being  so  carried  for  purchaser's  account,  and  at  the  same  rate  charged  the 
purchaser  by  the  private  insurance  companies  which  insure  the  purchaser's  equity. 
The  President  should  also  be  authorized  to  cause  the  difference  between  the  pre- 
miums so  collected  at  the  commercial  rate  and  the  actual  cost  of  the  insurance 
to  the  Government,  representing  a  sum  the  Government  is  able  to  save  in  virtue 
of  its  peculiar  position,  to  be  paid  into  the  Merchant  Marine  Development  Fund. 

The  object  of  the  legislation  just  indicated  is  to  provide  for  the  insurance  of 
American  ships  with  American  money,  and  for  the  development  of  an  American 
marine  underwriting  business  capable  of  protecting  the  American  Merchant 
Marine.  The  legislation  suggested  is  designated  to  turn  over  the  hull  and 
machinery  insurance  to  private  American  Insurance  Companies  in  the  same  ratio 
as  title  to  the  ships  passes  to  private  American  steamship  companies.  At  the 
same  time,  it  is  designed  to  enable  the  Government  to  retire  from  the  insurance 
business  in  the  same  ratio  as  it  retires  from  the  steamship  business. 

FEDERAL  CHARTER. 

Each  purchaser,  manager,  and  operator  for  Government  account,  or  oper- 
ator for  private  account,  who  acquires  title  to  or  otherwise  operates  in  the  over- 
seas trade  any  vessel  sold,  owned  or  chartered  under  the  legislation  now  in 
question  should  be  required  by  law  to  be  incorporated  under  federal  charter. 
Congress  has  been  requested  to  authorize  such  incorporation,  and  to  include  in 
the  law  the  requirements  that:  all  stockholders  shall  be  citizens  of  the  United 
States;  capitalization  shall  be  limited  to  property  value  plus  working  funds;  no 
additional  security  shall  be  issued  without  permission  from  the  Shipping  Board, 
or  such  other  Government  agency  as  may  be  designated  by  law  to  perform  its 
present  duties.  Complete  financial  statements  shall  be  published  quarterly,  and 

22 


the  Shipping  Board  shall  at  all  proper  times  have  access  to  the  companies'  books. 
The  board  of  directors  of  each  steamship  company  shall  include  one  director 
especially  designated  to  serve  as  liaison  officer  with  the  Government. 

Should  Congress  fail  to  pass  legislation  providing  for  federal  incorporation, 
it  should  make  conformity  with  these  requirements  a  condition  precedent  to  eligi- 
bility to  buy  or  otherwise  operate  Government  ships. 

THE  MERCHANT  MARINE  DEVELOPMENT  FUND. 

It  has  been  indicated  that  this  plan  contemplates  the  setting  aside  of  certain 
moneys  representing  the  difference  between  the  customary  commercial  charges 
for  interest  and  insurance  and  the  rates  at  which  the  Government,  in  virtue  of  its 
peculiar  position,  is  enabled  to  charge.  In  the  matter  of  interest,  it  is  estimated 
that  this  difference  would  be  1  per  cent,  which  represents  the  advantage  over  the 
costumary  commercial  rate  of  5  or  51  per  cent  the  Government  can  concede  with- 
out loss  in  view  of  the  fact  that  4  or  4 1  per  cent  is  the  rate  which  approximates 
the  interest  the  Government  is  accustomed  to  pay  for  short-term  borrowings  such 
as  Treasury  Certificates  of  Indebtedness.  In  the  matter  of  marine  insurance,  the 
experience  of  the  war  period  indicates  that  the  Government  can  safely  carry 
vessel  insurance  at  at  least  1  per  cent  of  the  value  of  the  vessel  below  the  com- 
mercial market  rate.  It  is  estimated  that  on  the  basis  of  $2,000,000,000  worth 
of  ships  sold  on  ton-year  terms,  the  money  derived  from  these  two  sources  will 
amount  to  $14,000,000  at  the  end  of  the  first  year,  accruals  in  progressively 
diminishing  sums  throughout  the  following  nine  years,  raising  the  total  size  of 
the  fund  for  the  ten-year  period  to  $72,800,000,  exclusive  of  any  interest  which 
may  be  earned  by  keeping  the  balance  on  hand  out  on  deposit  in  a  national  bank. 

In  this  connection,  there  should  be  enacted  legislation  which  would  empower 
the  President  to  pool  the  moneys  which  form  parts  of  the  Merchant  Marine 
Development  Fund  with  the  surplus  expected  to  accumulate  in  the  Shipping 
Board  operating  fund,  and  to  use  such  moneys,  or  any  part  of  them  which  may 
be  needed,  to  carry  out  the  spirit  of  the  policy  of  encouraging  the  establishment 
and  development  of  an  adequate  merchant  marine  under  the  American  flag.  This 
would  include  the  development  of  new  trade  routes,  and  the  financing  of  such 
other  kindred  enterprices  as  the  President  may  consider  important  to  the  wel- 
fare of  the  American  Merchant  Marine  as  the  instrument  of  American  over- 
seas trade. 


ADDITIONAL  LEGISLATION  NECESSARY. 

Before  any  large-scale  financing  of  the  purchase  and  operation  of  ships 
can  be  undertaken  in  the  United  States,  it  will  be  necessary  to  change  the  legal 
status  of  ships  mortgages  in  order  to  make  them  attractive  investments. 

23 


The  security  of  a  mortgage  may  be  imperiled  by  loss  or  damage  to  a  vessel, 
or  by  attachment  of  superior  liens.  Such  liens  can  generally  be  classed  as  those 
arising  from  debts  and  from  liabilities.  The  most  important  ones,  resulting  from 
debts,  arise  from  the  furnishing  of  repairs,  supplies,  or  other  necessaries  in  the 
maintenance  and  operation  of  a  vessel,  including  pilotages,  towages,  port 
charges,  crews'  wages,  and  other  contractual  obligations.  Liabilities  creating 
liens  result  principally  from  collisions,  strandings,  salvages,  general  averages, 
cargo  demages,  and  personal  injuries.  Practically  all  such  liabilities  can  be  in- 
sured against  by  the  standard  form  of  marine  insurance  policies,  and  by  pro- 
tection and  indemnity  insurance. 

If,  therefore,  the  mortgage  contains  covenants  and  agreements  to  compel 
the  mortgagor  to  insure  against  such  liabilities,  as  well  as  loss  from  fire  and 
marine  peril,  the  security  of  the  mortgage  will  only  be  jeopardized  by  liens  aris- 
ing from  contractual  obligations.  It  is  our  proposal  to  obtain  protection  against 
the  latter  by  amending  the  existing  law  so  as  to  assure  to  anyone  furnishing  such 
repairs,  supplies,  other  necessaries,  etc.,  the  opportunity,  by  exercising  due 
diligence,  of  obtaining  full  information  by  the  existence  of  the  mortgage,  and 
then  to  provide  that  the  lien  of  the  mortgage  shall  be  superior  to  liens  for  repairs, 
supplies,  and  other  necessaries  (contractual  obligations),  etc. 

By  this  co-ordination  of  mortgage,  covenants,  and  agreements  and  the 
statutes,  reasonable  and  adequate  protection  can  be  secured  to  the  mortgage.  We 
would  provide  for  such  notice  by  requiring  that  all  mortgages  be  recorded  with 
the  Collector  of  Customs  where  the  mortgaged  vessel  is  registered  or  enrolled  and 
that  the  ship's  registry  or  enrollment  have  endorsed  upon  its  face  the  names  of 
the  mortgagor  and  mortgagee,  the  place  of  record,  and  the  amount  secured 
thereby. 

Such  record  and  endorsement  would  be  made  a  condition  precedent  to  the 
validity  of  the  mortgage  as  against  all  the  world  save  the  mortgagor  and  mort- 
gagee. If  then  the  owner,  master  or  agent  of  any  vessel  apply  for  the  furnishing 
of  repairs,  supplies  and  other  necessaries,  or  for  the  rendition  of  contractual 
services  (except  for  the  services  of  seamen)  upon  the  mortgage  of  the  vessel, 
the  proposed  creditor  could  immediately  advise  himself  of  the  existence  of  any 
mortgage  by  examining  the  ship's  papers,  and  could  by  telegraphic  means  com- 
municate with  the  Collector  of  Customs  of  the  home  port  of  the  vessel  and  ascer- 
tain the  amount  remaining  unpaid  upon  the  mortgage.  With  this  information  the 
proposed  creditor  could  determine  for  himself  the  advisability  of  extending  the 
requested  credit.  If  he  did  so  and  a  foreclosure  of  the  mortgage  upon  the  vessel 
should  destroy  his  security,  he  would  be  without  grounds  of  complaint  against 
the  superiority  of  the  mortgage,  because  he  would  have  furnished  the  credit  with 
full  knowledge  of  the  superior  lien  of  the  mortgage. 

We  would  also  vest  in  the  United  States  District  Court  exclusive  juris- 
diction over  the  foreclosure  of  the  mortgages,  instead  of  leaving  the  mortgages 

24 


to  their  present  remedy  in  the  State  court.  This  would  make  the  practice 
uniform  and  therefore  greatly  enhance  the  security  value  of  the  mortgage  by 
providing  a  speedy  and  simple  method  of  foreclosure.  It  would  also  avoid  the 
inconsistencies,  delays  and  uncertainties  of  the  State  laws  and  procedure  which 
now  exist.  By-and-large,  the  enactment  of  a  statute  such  as  we  have  outlined 
would  make  of  a  mortgage  on  American  vessel  property  a  security  fully  as 
good  as,  and  in  some  respects  better  than,  a  mortgage  on  vessel  property  sailing 
under  any  other  flag. 

OCEAN  MAIL  SERVICE. 

In  connection  with,  and  as  port  of  a  policy  contemplating  the  establish- 
ment and  development  of  an  adequate  merchant  marine  under  the  American 
flag,  an  adequate  American  overseas  mail  service  should  be  provided. 

We  have  had  a  number  of  mail  subvention  statutes  on  the  books  for  many 
years,  but  they  have  failed  to  accomplish  what  they  were  intendend  to  accom- 
plish because  they  are  based  on  the  principle  of  paying  a  bonus  which  was  not 
large  enough,  and  could  not  in  justice  b&  made  large  enough,  to  call  into  exist- 
ence on  its  own  account  the  large,  fast  vessels  to  which  the  law  made  it 
payable. 

Now  that  we  have  a  substantial  merchant  fleet  either  in  hand  or  in  prospect, 
the  Shipping  Board  believes  there  should  be  legislation  which  would  discard 
the  mail  subvention  or  bonus  principle,  and  pay  for  the  carrying  of  the  over- 
seas mail,  including  an  overseas  extention  of  the  parcel  post,  on  the  basis  of 
service  rendered. 

Inasmuch  as  a  constant  flow  of  mail  between  American  business  men  and 
their  foreign  customers  would  give  more  reliable  service  than  the  occasional, 
and  at  present  uncertain  and  inadequate,  communication  provided  by  passenger 
liners  most  of  which  fly  foreign  flags  we  have  recommended  that  the  United  States 
mails  be  carried  in  all  American  vessels  plying  regular  routes  at  a  speed  of 
twelve  or  more  knots  an  hour,  and  that  provision  be  made  by  law  for  payment 
to  such  ocean  mail  carriers  on  the  basis  of  service  rendered. 

WIRELESS  TELEGRAPH. 

The  Shipping  Board  believes  that  for  the  purpose  of  promoting  the  safety 
of  life  and  property  at  sea;  for  the  purpose  of  facilitating  the  instant  trans- 
mission of  commercial  and  maritime  information,  and  for  other  purposes,  all 
merchant  vessels  flying  the  American  flag  should  be  equipped  with  the  wire- 
less telegraph.  We  have  recommended  that  this  equipment  be  owned  by  the 
Government  and  operated  by  naval  reserve  personnel,  and  that  legislation  cover- 
ing such  installation  and  operation,  including  provision  for  increased  naval 
reserve  personnel,  be  enacted. 

25 


TRAINING  OF  AMERICAN  MERCHANT  OFFICERS. 

% 
As  in  the  case  with  the  ocean  mail  laws,  the  laws  now  on  the  statute  books 

covering  the  training-  of  cadet  officers  should  be  revised  to  meet  the  new  con- 
dition. Our  old  laws  compelled  mail  steamers  to  carry  one  cadet  for  each 
thousand  tons  burden.  The  cadet  was  an  extra  member  of  the  crew,  and  had  to 
be  paid  and  fed  by  the  steamship  company.  Inasmuch  as  the  demand  for 
American  officers  was  not  large  enough  to  give  the  steamship  company  any 
incentive  to  educate  and  train  them,  it  naturally  made  the  cadets  shine  brass, 
polish  brightwork,  and  do  other  menial  labor  for  their  pay  and  keep  instead 
of  educating  them.  They  were  taken  aboard  chiefly  because  the  law  required 
a  full  crew  list.  Not  many  of  them  made  more  than  one  or  two  voyages. 

Now  the  training  of  an  American  officer  personnel  has  become  a  matter 
of  national  importance,  and  we  have  recommended  that  it  be  taken  up  by 
Congress.  Legislation  should  require  that  all  merchant  ships  carry  at 
least  two  and  not  more  than  ten  cadet-officers.  Half  of  them  should  be 
trained  as  deck  officers  and  half  as  engineer  officers.  The  course  should 
extend  over  two  full  years.  The  cadets  should  be  paid  living  salaries  by  the 
Government,  and  the  Government  should  pay  the  steamship  companies  fees  for 
their  tuition.  They  may  be  selected  from  the  boys  who  already  have  elected  to 
follow  the  sea,  or  from  those  who  wish  to  do  so.  They  may  be  appointed  as  the 
result  of  an  examination  held  in  the  Customs  Houses  by  the  local  boards  of 
steamboat  inspectors  under  the  auspices  of  the  Civil  Service  Commission. 

UNDERLYING  PRINCIPLES  OF  THE  PLAN. 

To  my  mind,  the  outstanding  vital  features  of  this  plan  are  the  provisions 
for  sound  capitalization  and  the  several  provisions  designed  to  stimulate  rapid, 
systematic  and  co-ordinated  development  through  the  active  co-operation  of 
all  interests  connected  with  the  steamship  business. 

I  have  told  how,  while  people  were  talking  about  "the  war  after  the  war", 
the  British  Government  took  the  precaution  to  frame  and  administer  its  re- 
quistion  regulations  in  a  manner  which  prevented  the  inflation  of  the  book 
value  of  British  tonnage.  The  idea,  no  doubt,  was  to  keep  British  ships  in  a 
position  of  financial  advantage,  as  compared  to  the  higher-valued  ships  of  other 
nations,  which  would  enable  them  safely  to  do  such  rate-cutting  as  might  prove 
necessary  to  meet  postbellum  competition.  Whatever  advantage  this  precaution 
may  have  given  to  British  ships  is  now  annulled  by  the  rise  in  valuations  which 
has  followed  the  relaxation  of  the  requisition  restrictions.  But  had  the  British, 
or  any  other  Government  been  able  during  the  war  to  place  its  fleets  on  the 
sound,  pared-to-the-bone,  capitalization  basis  which  the  Shipping  Board  plan 
contemplates  for  the  new  American  fleets,  those  fleets  would  have  had  an 
initial  and  indestructible  advantage  over  competitors  which,  in  any  rate  war, 
would  have  became  greater  and  more  pronounced  every  time  a  rate  was  cut. 

26 


OWNERSHIP  THE  GOAL. 

It  cannot  have  escaped  notice  that  the  entire  Shipping  Board  plan  has 
been  moulded  about  the  central  idea  of  developing  direct  popular  ownership 
of  merchant  shipping,  and  direct  popular  participation  in  all  the  profits  it  earns. 
Every  detail  of  organization  and  administration,  including  the  education  of 
prospective  new  shipowners  by  employing  them  to  operate  unsold  ships  in  new 
trade  routes  for  Government  account,  has  been  fashioned  with  the  idea  of 
placing  those  ships  as  soon  as  possible  in  the  hands  of  American  citizens  who 
have  resolved  to  lay  down  a  heavy  stake  upon  their  ability  and  determination 
successfully  to  engage  in  the  business  of  serving  and  extending  the  overseas 
trade  of  the  United  States.  Every  inducement  and  protection  which  the  Gov- 
ernment can  offer  without  sacrifice  to  the  public  interest  is  offered  them. 

World  conditions  permit  the  ships  to  be  sold  on  terms  which  will  reimburse 
the  Government  for  the  cost  of  construction,  and,  if  Congress  acts  favorably 
upon  a  recommendation  which  I  have  made,  the  enterprising  groups  of  citizens 
who  buy  ships  now  will  be  permitted  to  take  advantage  of  the  extraordinarily 
favorable  opportunities  of  the  next  three  abnormal  years  and  so  strengthen 
their  financial  position  that  they  need  have  no  apprehension  whatever  about 
their  ability  to  meet  successfully  whatever  conditions  the  return  to  normal  times 
may  bring  about. 

Briefly,  this  recommendation  was  to  the  effect  that  the  citizens  who  buy 
vessels  now  be  permitted  to  charge  off  annually  out  of  earnings  for  three 
years,  in  addition  to  the  customary  five  per  cent,  a  special  amortization  of  ten 
per  cent,  the  amount  of  the  special  amortization  so  charged  off  to  be  exempted 
from  federal  taxation,  provided  that  within  the  three  years  the  shipowners  use 
the  special  amortization  fund  so  set  aside  from  the  earnings  of  all  his  vessels 
to  construct  one  or  more  new  vessels  in  an  American  shipyard.  I  believe  this 
special  amortization  is  a  legitimate  charge  against  the  cost  of  transacting  cur- 
rent business  done  on  present  valuations,  which  have  not  been  created  by  the 
new  steamship  owners,  but  much  of  which  —  especially  in  ship  construction  — 
is  known  to  have  been  created  by  various  acts  of  this  and  other  Governments 
while  striving  to  get  quick  results  in  an  emergency.  It  seems  to  me  no  more 
than  just  that  at  this  time,  when  every  value  on  earth  is  being  questioned,  the 
Government  takes  this  step,  which  is  also  a  help  to  the  uncertain  future  of  the 
shipping  industry  to  impart  confidence  to  the  men  who  buy  and  build  ships. 

If  this  is  not  done,  I  fear  that  a  great  many  ships  will  not  be  sold  at  this 
time.  Many  a  man  who  would  like  to  buy  ships  today  and  intrench  himself 
firmly  in  the  business  during  the  next  three  years  of  high  earnings,  naturally 
hesitates  when  he  sees  the  shipyards  offering  to  deliver  new  vessels  in 
eighteen  months  or  two  years  at  $150  a  ton,  or  seventy-one  per  cent  of  what 
a  purchaser  has  to  pay  today.  If  he  could  see  his  way  clear  to  write  off  enough 
to  enable  him  to  meet  the  competition  of  the  $150-ship  two  years  hence,  he 
would  not  hesitate. 

27 


The  Government,  too,  has  an  interest  in  this  matter,  for  it  would  seem 
wiser  to*  forego  a  little  taxation  now  than  to  be  obliged  to  sell  the  greater  part 
of  the  fleet  at  a  forty  per  cent  loss  two  or  three  years  hence,  when  the  $150 
new  ships  begin  coming  on  the  market  in  quantity.  Then  it  may  not  only  be 
necessary  for  the  Government  to  meet  the  $150  price;  it  may  also  be  necessary 
to  make  an  additional  concession  equivalent  to  three  years'  normal  depreciation 
at  five  per  cent  a  year  in  order  to  place  the  three-year-old  ship  on  competitive 
parity  with  the  new  ship. 

THE  MENACE  OF  CHARTERING  SHIPS. 

Throughout  all  our  studies  and  plans  we  have  kept  before  our  minds' 
eyes  the  objective  of  creating  a  merchant  marine  owned  and  operated  by 
citizens  who  believe  in  its  future,  who  have  staked  their  all  upon  success, 
and  who  stand  ready  to  back  their  convictions  with  all  the  personal  and 
collective  moral,  intellectual,  physical  and  financial  resources  they  possess. 
So  far  a  goodly  number  of  such  citizens  has  come  forward.  They  and  the 
commerce  of  the  country  are  enjoying  the  results  of  their  American  courage 
and  initiative.  We  are  all  proud  of  them.  Many  more  such  men  stand  ready 
to  buy  ships,  but  a  pall  of  doubt  suddenly  has  been  thrown  over  the  situation 
by  a  fresh  outburst  of  the  same  old  propaganda  to  which  I  have  referred  before, 
accompanied  by  agitation  before  Congress  for  the  enactment  of  a  law  under 
which  the  Government  would  charter  or  lease  its  ships  for  five  year  periods  to 
anyone  who  wants  to  try  his  hand  at  the  game. 

It  does  not  require  much  business  sense,  or  even  much  imagination,  to 
comprehend  that  the  adoption  of  such  a  policy  would  shatter  forever  our 
hope  of  establishing  a  permanent  American  merchant  marine.  The  steamship 
operator  who  operates  chartered  ships  is  the  seagoing  analogue  of  the  man  on 
shore  who  engages  in  business  on  a  ten-million-dollar  scale  with  a  thousand 
dollars  capital  what  is  commonly  known  as  a  ''shoestring  operator". 

We  cannot  expect  any  man  or  group  of  men  who  have  any  business 
acumen  whatever  to  invest  millions  of  dollars  in  vessel  and  terminal  property 
when  other  men  can  get  the  full  use  of  similar  ships  at  an  outlay  of  only 
a  small  monthly  rental.  Having  no  capital  liabilities  to  protect,  and  none  of 
the  other  restraints  and  responsibilities  of  ownership,  the  operator  who  charters 
ships  is  free  to  shift  his  vessels  from  one  trade  route  to  another,  slashing  rates 
right  and  left,  demoralizing  the  business  of  legitimate  steamship  companies; 
and  finally,  when  he  has  exhausted  all  the  possibilities  of  the  present  excellent 
opportunity  for  such  piratical  operations,  he  is  free  to  step  out  and  throw  his 
vessels  back  on  the  hands  of  the  Governmenet.  The  summary  revocation  of  the 
charters  of  such  an  operator  would  do  no  good,  for  the  next  day  the  vessels 
probably  would  be  chartered  to  another  operator  who  would  repeat  the  per- 
formance. 

28 


It  cannot  be  argued  that  I  have  taken  an  extreme  view  of  this  situation 
because  everyone  knows  that  the  Government  has  no  power  to  control  ocean 
freight  rates  in  the  foreign  trade,  except  to  the  extent  of  preventing  a  steam- 
ship operator  from  discriminating  against  an  American  merchant  in  favor  of 
a  foreign  merchant.  Nothing  short  of  a  long  series  of  international  agreements 
could  make  it  possible  for  our  Government  to  control  freight  rates  in  our 
overseas  trade.  These  agreements,  of  course,  would  have  to  be  made  with  our 
marine  competitors,  so  it  is  easy  to  guess  how  much  sympathy  we  would  get. 
Moreover,  all  Americans  would  blush  to  see  our  Government  driven  to  beg  such 
favors  of  competitors  in  consequence  of  its  own  folly. 

At  first  glance  it  seems  incredible  that  any  considerable  body  of  American 
citizens  would  come  forward  and  seriously  advocate  such  a  proposition,  especially 
at  this  time  when  ownership  and  permanent  organization  should  be  our  goal. 
After  reading  the  evidence  advanced  before  the  ship  subsidy  hearings  in  Con- 
gress during  the  last  twenty-odd  years,  and  after  reading  the  newspaper  articles 
and  interviews  to  which  I  have  referred,  and  which  are  still  being  published 
day-by-day,  the  answer  is  not  difficult  to  find.  They  are  not  the  real  American 
steamship  men,  the  men  who  have  owned  and  operated  ships  under  the  American 
flag  through  good  times  and  bad,  for  years  and  years.  Nor  are  they  men  of 
the  type  we  wish  to  see  operating  the  ships  of  the  American  merchant  marine. 

It  is  not  the  real  American  shipowner,  or  the  enterprising  aspirant  ship- 
owner, but  men  of  the  type  I  have  just  described,  and  a  large  number  of  men 
who  aspire  to  follow  in  their  selfish  footsteps,  who  constitute  the  driving  force 
behind  the  agitation,  urging  the  wholesale  chartering  of  Government  vessels 
to  whoever  wished  to  operate  them.  With  these  men  are  a  great  many  loyal 
and  honest  citizens  whom  they  have  mislead  by  posing  as  American  steamship 
men  of  long  experience,  and  therefore  authorities  on  the  subject. 

It  may  be  that  later  on,  when  we  have  the  situation  better  in  hand,  we 
may  find  it  useful  to  employ  the  "bare  boat"  commercial  ship  charter  form, 
with  a  clause  providing  for  the  setting-aside  of  a  sinking  fund  out  of  earnings, 
as  a  bill  of  sale  in  selling  vessels  on  the  installment  plan.  The  Shipping  Board 
recommendations  to  Congress  contain  broad  provisions  under  which  this  may 
be  done.  But  in  no  sense  would  such  a  practice  be  chartering  ships  in  the 
commercial  sense  of  the  word;  nor  would  the  man  who  took  the  ship  on  such 
a  basis  have  any  advantage  over  the  man  who  buys  ships  outright,  or  under 
any  other  plan. 

COST  OF   SHIP-CHARTERING  TO  THE  GOVERNMENT. 

In  strict  consistency  with  their  testimony  at  congressional  hearings  and 
their  published  interviews  and  announcements  advocating  ship  subsdies  at  the 

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Government's  expense,  the  advocates  of  this  ship-chartering  plan  now  want  the 
Government  to  assume  all  the  responsibilities  and  expenses  incident  to  owner- 
ship which,  as  I  have  said  before,  they  wish  to  avoid  themselves.  I  informed 
Congress  of  the  Board's  opposition  to  any  ship-chartering  plain  in  writing  as 
follows : 

"From  the  stipulations  set  forth  in  the  plan  we  submitted  to  you  on  June 
10,  you  can  see  clearly  that  the  Shipping  Board  considers  it  vital  to  guard  and 
limit  carefully  the  practice  of  chartering  or  leasing  ships — if,  in  fact,  it  proves 
desirable  to  charter  or  lease  at  all. 

"One  reason  for  this  attitude  is  our  desire  to  create  a  merchant  marine 
based  upon  the  solid  foundation  of  ownership  and  serious,  determined  ambition 
to  grow  and  to  succeed.  We  do  not  wish  to  shatter  this  objective  by  making 
it  possible  for  anyone  to  get  the  full  use  of  the  Government  ships  by  paying 
only  a  small  monthly  rental,  avoiding  all  the  responsibilities  of  ownership. 

"Moreover,  such  men  would  be  a  constant  menace  to  the  American  steam- 
ship business.  It  would  be  impractical  to  control  them.  They  would  be  free 
to  shift  their  vessels  from  one  trade  route  to  another,  demoralizing  the  business 
of  the  serious,  constructive  men  who  have  thrown  their  all  into  the  business 
of  serving  the  overseas  trade  of  the  United  States.  Then  they  could  simply 
throw  their  vessels  back  into  the  hands  of  the  Government,  depreciated  in 
accordance  with  the  usage  they  had  received. 

"The  question  of  chartering  the  Government  ships  to  private  operators  is 
a  very  complicated  one,  and  I  think  you  should  have  the  other  salient  points 
of  the  proposition  before  you.  Therefore,  I  am  going  to  give  you  an  outline. 
I  feel  that  the  importance  of  the  subject  will  justify  my  writing  at  some  length. 

"Everyone  knows  that  the  commercial  practice  of  time-chartering  ten  or 
a  dozen  vessels  for  operation  in  a  few  trade  routes  always  has  been  a  profitable 
business,  and  many  foreign  shipowners  are  engaged  in  it.  But  when  the 
Government  undertakes  to  time-charter  2,000  ships  scattered  over  all  the  trade 
routes  of  the  world,  the  proposition  assumes  a  different  aspect. 

"In  order  to  man,  victual,  insure  and  keep  repaired  2,000  ships,  the 
Government  would  be  obliged  to  maintain  a  nation-wide  recruiting  and  training 
organization  capable  of  keeping  100,000  positions  filled  on  board  ship.  It 
would  also  have  to  maintain  a  national  steward's  and  commissary  department 
with  purchasing  and  distributing  agencies  in  every  American  and  many  foreign 
seaports.  In  addition,  there  would  have  to  be  a  large  auditing  organization  to 
look  after  the  finances  of  the  recruiting  and  commisary  departments,  and  to 

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handle  accounts  with  operators,  repair  yards,  etc.  A  large  legal  department 
capable  of  looking  after  the  charter  contracts  and  of  handling  the  questions 
of  admiralty  law  arising  out  of  the  operation  of  vessels,  and  an  insurance  de- 
partments with  a  corps  of  trained  adjusters  would  also  be  necessary. 

"It  goes  without  saying  that  the  cost  of  all  this  establishment  to  the 
Government  would  be  large,  and  if  to  this  overhead  we  add  the  wages  and 
subsistence  of  100,000  seagoing  men;  the  cost  of  their  food;  the  cost  of  marine 
insurance  for  2,000  ships  and  the  cost  of  keeping  the  whole  fleet  in  repair, 
we  would  get  a  very  large  total. 

If  the  going  time-charter  rate  was  $7.00  a  deadweight  ton  a  month,  the 
Government's  monthly  income  from  a  fleet  of  10,000  tons  would  be  $70,000,000. 
At  an  average  freight  revenue  of  $12.50  a  deadweight  ton  a  month  (which  is 
about  the  current  revenue  of  well-managed  free  ships)  the  operators  would 
receive  a  monthly  revenue  of  $55,000,000,  from  which  they  would  have  to  meet 
expenses  totaling  much  less  than  the  Government's  expenses. 

"Under  such  an  arrangement  it  seems  that  the  Government  would  be 
obliged  to  appropriate  large  sums  annually  to  make  up  an  operating  deficit; 
and  if  this  should  prove  true,  it  would  be  doubtful  if  the  Government  ever  could 
recover  a  dollar  of  the  money  spent  on  the  construction  of  the  fleet.  Also, 
I  think  you  will  agree  that  if  the  Government  ever  embarked  on  a  policy  of 
chartering  its  vessels  it  could  succeed  in  selling  few,  if  any.  Operators  would 
not  be  likely  to  lay  out  a  million  dollars  for  a  ship  and  assume  all  the  risks  and 
responsibilities  of  ownership  when  the  Government  offered  them  the  much 
easier  alternative  of  hiring  it  at  a  small  monthly  rental,  and  in  addition  relieved 
them  of  the  expense  and  trouble  incident  to  manning,  victualing,  insuring,  etc. 

"Of  course  the  bare-boat  form  of  charter  would  not  cause  the  Government 
to  maintain  quite  so  large  an  organization,  or  to  bear  quite  so  great  an  expnese, 
as  time  form.  Still,  it  Would  cut  the  Government's  revenue  from  $7.00  to  $4.00 
a  deadweight  ton  a  month  (or  from  $70,000,000  to  $40,000,000),  and  it  would 
not  help  the  Government  to  sell  the  ships,  or  to  reimburse  itself  for  its  con- 
struction outlay.  Furthermore,  any  system  of  chartering  would  naturally  result 
in  the  running  down  of  the  fleet,  which,  after  a  few  years,  would  equally 
and  naturally  be  thrown  back  on  the  Government's  hand  worthless  for  com- 
petitive use  at  sea." 

I  am  hopeful,  however,  that  some  of  the  investigations  now  in  progress  in 
both  houses  of  Congress  will  reveal  enough  of  the  intricacies  of  the  steamship 
business  to  prevent  the  taking  of  any  serious  false  step.  I  am  hopeful  that 
Congress  will  soon  give  the  Shipping  Board  o  cbnitcr  of  broad,  constructive 

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powers  under  which  it  can  invite  the  American  people  to  come  into  the  steam- 
ship ^business  fearlessly,  and  to  build  undisturbed  on  the  sound  foundation  of 
ownership,  courage,  initiative  and  co-operation." 


EDWARD  N.  HURLEY, 
Chairman  United  States  Shipping  Board. 


July  31st,  1919. 


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